São Paulo – Non-oil activities in the United Arab Emirates may be up 4.2% this year, following a 3.8% increase in 2012, according to a report released this Tuesday (30th) by the International Monetary Fund (IMF). “A broadening recovery in construction and real estate and ongoing growth in non-tourism-oriented sectors are expected to underpin a further acceleration in non-oil growth,” according to an IMF press release about the conclusion of the Article IV Consultation, a regularly held discussion of economic and financial policies involving IMF technicians and officials from IMF member-countries.
According to the press release, non-oil activities are gaining strength in the country, which is investing in economic diversification to reduce its dependence on the commodity. Last year, the Gross Domestic Product (GDP) of the Emirates was up 4.3%, according to the report, with oil sector growth at 5.2% and non-oil sector growth at 3.8%. In 2013, aside from betting in a pickup of non-oil growth, the IMF believes the increase in oil output should slow down, considering the global scenario of low growth rates.
Another indicator of the strength of Emirati non-oil sectors was last year’s current account surplus, equivalent to 17% of the GDP, due not only to oil exports but “supported also by buoyant non-hydrocarbon exports.” For the sake of comparison, Brazil posted a current account deficit equivalent to 2.4% of its GDP in 2012.
This scenario should persist past this year. According to the IMF, non-oil sector growth should remain “strong,” at above 4% in the medium term. The Fund adds that economic growth is not creating inflationary pressure. The inflation rate was 0.7% in 2012 and should see a “moderate” increase in 2013.
Risks
These estimates may prove untrue, however, due to external factors, as an eventual worsening of the world economy may have a direct effect on some of the Emirates’ main activities, such as oil exports, international tourism and foreign trade.
Even local activities are susceptible to mood swings in foreign capital. The Dubai Land Department, for instance, announced this Tuesday that the emirate’s real estate sector received US$ 14.42 billion worth of investment in the first half of this year, of which US$ 8.7 billion, i.e. over 60%, have originated from non-Arab investors.
The Fund claims, however, that these external risks have diminished, even though they remain “substantial.” The growth of non-oil sectors in coming years should be underpinned by the Dubai’s “strong core service” and Abu Dhabi’s “diversification efforts.”
The IMF advises on the implementation of policies to prevent formation of “boom-bust cycles” such as the one seen in real estate in the wake of the 2008 international financial crisis. In that regard, the Fund notes that the indebtedness levels of Dubai and its government-related companies remain high, and that “several large maturities are now drawing closer, including on restructured debt, between 2014 and 2018.” The IMF warns that these organizations will continue to face financial challenges.
The most badly hit company at the time was the real estate developer Nakheel, which is in charge of several real estate megaprojects in Dubai, alongside the Dubai Holding conglomerate of which it was a part. The company called for a moratorium on its debt and later it renegotiated deadlines and values with its creditors. That led to a sharp decline in real estate activities, which had previously been one of the emirate’s main strengths.
The IMF warns that many of Dubai’s government-related companies remain “non-transparent” and that makes it difficult to assess their financial health and the macroeconomic risks they entail. On the other hand, however, the Fund notes that Dubai’s government-related companies and banks are increasingly regaining access to external financing, “in an environment of high global liquidity and search for yield.” The Fund recommends caution upon using these funds in large real estate and tourism projects, so as to prevent a new boom-bust cycle.
*Translated by Gabriel Pomerancblum
